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Case Study: SUBDOMAIN 705.1 – HEALTHCARE ENVIRONMENT AND COMMUNITY HEALTH

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SUBDOMAIN 705.1 – HEALTHCARE ENVIRONMENT AND COMMUNITY HEALTH

Competency 705.1.1: Needs Assessment – The graduate designs, administers, and evaluates a community health needs assessment.
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Introduction:

A community health assessment is a developmental process that is added to and amended over time. It is not an end in itself, but a way of using information to plan healthcare and public health programs. In the “Service Line Development Case Study,” there is a community health needs assessment that describes the state of local individuals’ health. This assessment allows the major risk factors, the causes of ill health, and the actions required to address these health risks to be identified.

Task:

A. Analyze the community health needs assessment in the case study by doing the following:
1. Discuss major risk factors identified in the assessment.
2. Discuss whether the healthcare facility in the case study is addressing the needs identified in the assessment.

B. Develop a health planning summary outlining recommendations of how to resolve any outstanding community health needs.

C. When you use sources, include all in-text citations and references in APA format.

Note: When bulleted points are present in the task prompt, the level of detail or support called for in the rubric refers to those bulleted points.

Note: For definitions of terms commonly used in the rubric, see the Rubric Terms web link included in the Evaluation Procedures section.

Note: When using sources to support ideas and elements in a paper or project, the submission MUST include APA formatted in-text citations with a corresponding reference list for any direct quotes or paraphrasing. It is not necessary to list sources that were consulted if they have not been quoted or paraphrased in the text of the paper or project.

Note: No more than a combined total of 30% of a submission can be directly quoted or closely paraphrased from sources, even if cited correctly. For tips on using APA style, please refer to the APA Handout web link included in the General Instructions section.

Community Health Assessment

Describe three recent situations in which you were directly affected by poor product or service quality.

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Describe three recent situations in which you were directly affected by poor product or service quality. What might have been the cause and how might statistical quality control help eliminate these situations?

statistical quality control essay

statistical quality control essay

 

 

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Poor product or service quality affect consumers even with the existence of quality and standards bodies that ought to protect consumers from such. The first situation in which poor service affected me occurred when I subscribed with Verizon Communication Inc. as my internet provider. The internet speeds were quite slow in my area and suffered occasional outages. The main reason for this problem was the distance between my house and the servers. The IT experts failed to consider that the distance was much further than the signal could get. Statistical quality control can help eliminate such a problem by testing the services for defects (Montgomery, 2012). The process could enable the company decide whether to reject or accept the internet connection in the specific locality.

The second situation occurred when I purchased clothes from a popular online retail store. A mix-up of orders occurred and it took long for the online store to get the correct orders that I had requested. Additionally, I paid the entire cost of sending the products back to the online store. Negligence was the most likely cause of the mix-up I experienced. This is true judging by the number of customers with similar complaints. Statistical quality control emphasizes on early detection of problems. As such, the method focuses more on prevention rather than taking corrective decisions. This would have helped avoid the mix-up.

The third situation occurred when I purchased a discounted mountain bike from a retail store. On using the mountain bike for a week, it developed significant problems that I decided to throw it away. Poor quality control mechanisms at the store contributed to this problem. Statistical quality control could help avoid this situation by ensuring there is control. Control charts can help identify whether there are defective units and the proportion of the defects (Montgomery, 2012). If the proportion of defects is high, the batch of goods is rejected.

 

Reference

Montgomery, D. C. (2012). Statistical quality control, 7th edition. New York, NY: John Wiley &             Sons.

Supply Chain Management Topics: EDI ,RFID and Supply chain uncertainty

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EDI, RFID,Supply chain uncertainty Sample Paper

Topics:EDI, RFID,Supply chain uncertainty Sample Paper

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EDI

EDI refers to electronic data interchange commonly applied in supply chain management. Electronic data interchange is important in supply chain management since it provides a platform for inter-organizational information exchange among various supply chain firms. Firms that are involved in a supply chain normally communicate on frequent basis. In supply chain management, there is need for close coordination of logistic activities between suppliers and customers. The application of EDI enhances the coordination of various inter-organizational activities as well as promoting integration between various supply chain members. The key of EDI technology is to aid the transfer of information and electronic documents seamlessly across various users in the supply chain (Cheng & Choi, 2010).

RFID

RFID is an acronym for ‘radio frequency identification’, a technology that enables real time tracking of inventory in an accurate and cost efficient manner (Sabbaghi & Vaidyanathan, 2008). The technology involves the use of a transponder that can be tracked using special readers. Whenever an item is passed over the reader, a signal is automatically emitted giving various details about the product. RFDI technology gives organizations the ability to tracking and securing products in the supply chain as they move to customers. Through the application of this technology, an organization is able to transpose items to the virtual world – and thus shared data by using the internet. RFID systems can also be used in sharing information across various organizations. Another important use of these systems is in reducing theft of products by either the employees or customers.

Supply chain uncertainty

Supply chain uncertainty refers to a situation whereby supply chain managers are unable to correctly make decisions due to a number of reasons which encompass: lack of adequate informational about the supply chain environment, poor information processing, and inability to weight the impact of various actions on the behavior of the supply chain. Supply chain uncertainty is also driven by the ever increasing complexity associated with international supply chain networks. There are four segments that have significant impact on the supply chain uncertainty. These include: supply, manufacturing, control systems in place, and demand. Availability of up-to-date market data and decision support systems can helps supply chain managers to drastically reduce the supply chain uncertainty (Simangunsong, Hendry, & Stevenson, 2011).

 

References

Cheng, T. C. E., & Choi, T.-M. (2010). Innovative quick response programs in logistics and        supply chain management. Berlin: Springer.

Sabbaghi, A., & Vaidyanathan, G. (2008). Effectiveness and efficiency of RFDI technology in     supply chain management: strategic values and challenges. Journal of Theoretical and   Applied Electronic Commerce Research, 3(2): 71-81.

Simangunsong, E., Hendry, L. C., & Stevenson, M. (2011). Supply-chain uncertainty: a review    and theoretical foundation for future research. International Journal of Production       Research, 50(16): 4493-4523.

Unit 7: Supply Chain Management 

Research the following topics related to Supply Chain Management:

  1. Procurement
  2. EDI
  3. Risk Management
  4. RFID
  5. Supply chain uncertainty

Select three of the topics listed and compose three paragraphs describing the topics, one paragraph per selected topic, based on the course material and additional research you conduct online.

 

Supply Chain Management Sample paper

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Supply Chain Management Sample paper

Supply Chain Management Sample paper

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The management of operations of a company determines the success or failure of that particular company. Supply chain management is more concerned with oversight of material, information, and finances as they move from supplier to the manufacturer to wholesaler, to the retailer to the consumer than it is concerned with management. It is the duty and responsibility of a supply chain manager to ensure there is effectiveness and efficiency when it comes to distribution of goods and services from the supplier to the final consumer of that particular product or service.

Question 1

Earlier in my career, I worked as a manager in a fast food organization that was mainly dealing with the burger. Each product and service has its supply chain components depending on the type of the product and services the organization deals with (Christopher, 2016). At the restaurant we used to have a supply chain based on three – legged stool concept of suppliers _ company _ franchises. The supplier of the company had to deliver the different raw materials that are used in making the burger that includes meat, vegetables, and baking floors. The company or the restaurants transform them into finished products which are ready to de delivered to consumers by franchises. The upstream activities include the delivery of raw materials by suppliers while downstream activities include delivery of final product to consumers by franchises.

Question 2

Social and environmental responsibilities are a current issue that might negatively affect a company’s global supply chain. Requesting the sterilization of chemicals emitted from the manufacturing process or abiding by the labor laws of a country may negatively affect the supply of a product (Christopher, 2016). Moreover, supplier social and environmental responsibility is becoming risky as more and more safety laws are passed as laws.

 

References

Christopher, M. (2016). Logistics & supply chain management. Pearson Higher Ed.

 

Supply Chain Management Sample paper Instructions

A supply chain involves all the activities associated with how manufacturing, materials, facilities, personnel, transportation, inventory, and other items flow and a supply chain involves all the activities associated with how manufacturing, materials, facilities, personnel, transportation, inventory, and other items flow and then are transformed into goods and services. Every asset, information, and process is part of the supply chain. For this Discussion, you will be addressing how the supply chain works and possible issues you may encounter.

Within this complex system, operation management responsibilities can be both strategic and tactical.

Examine the place where you currently work, or a prior career, and identify a single service or product produced by your organization.

  1. Identify the different components of the supply chain for that product or service (list them from beginning to end). Be sure to identify which parts of the supply chain are considered “upstream” and “downstream” exchanges.
  2. Based on what you learned from your research, describe a single current issue that might negatively impact a company’s global supply chain.

 

Applying Network Models

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Applying Network Models Sample paper

Applying Network Models Sample paper

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At times people are supposed to represent their ideas and concepts in the form of graphs or drawings. The network model is a database model established and developed as a flexible way of representing ideas, concepts and objects and their relationships and correlations. Thus, when applying a network model, one may be forced to use a chain or a web to show the relationship between concepts (Castillo, 2012).  A chain can represent a simple relationship may be represented by a chain, but a web can represent a complex correlation.

The minimal – spanning – tree – technique

A spanning tree of representation is a subgraph that consist all the vertices and is a tree-like structure or model. One single graph may have different spanning trees. The minimal – spanning – tree –model may be used in designing a network especially a phone network design. Thus, the area of coverage and number of phones that an individual wants to cover determines the complexity of the model.

The shortest path model

This technique is used to find the path between two vertices in a graph. The graphs vertices correspond to intersections and edges correspond to segments. In most cases, this model is used to find the shortest route to get to a destination to save time and energy (Castillo, 2012). This technique may be used by engineers to construct a road from one point to another.

The Maximal flows through a network technique

Maximum flow models help to find a feasible flow through a single-source, single-sink flow network that is maximum. This technique is widely used to solve special cases of more complex network flow problems.  Linear programming is an example of a situation and scenario where the maximal flow model can be applied to find a solution considering that constraints are given by the definition of a legal flow.

References

Castillo, E. G. (2012). Expert systems and probabilistic network models. Springer Science & Business Media.

 

Applying Network Models   Instructions

Discussion Best Practices

The Discussion is a great place to learn in an interactive environment, so be sure to participate actively in the weekly Discussion. By doing so, the entire class benefits from the Discussion and learning is significantly enhanced. You will need to respond substantially to at least two of your classmate’s posts. Please try to make your initial posts no later than Sunday night to give your classmates an opportunity to respond. You should also post throughout the week so that you can respond to any responses your classmates have made to your posts as well as participate in the Discussion. Be sure your post is grammatically correct, has been spell checked, and fully answers the question.

Provide at least one example of when you might use (1) the minimal-spanning-tree technique, (2) the shortest path, and (3) the maximal flow through a network technique. and explain why it would be the appropriate technique to apply in each of the situations you describe. Please be thorough and provide enough detail to allow meaningful responses from your classmates.

 

 

Unit 6 Discussion: Forecasting Sample paper

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Forecasting

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Many organizations need forecasting in order to make necessary operational and strategic plans. Forecasting is the use of historical data to determine the direction of the future trends that can affect an organization. Forecasting is widely used by firms and enterprises to determine the best way to allocate resources and budgets for a future period. Forecasting is typically based on the demand for goods and services of a company to the cost incurred in the production of those goods and services (Abraham, 2009).  Forecasting plays an important role especially for a start-up by giving it a sense of direction.

Case 1

As the case shows, forecasting is part and parcel of a successful organization considering that the organization can project various things ranging from profit to demand and cost. However, each new business should be projected independent, and there should be nor importation of projects from other organizations because they may be ambiguous. I agree that projection of location is crucial to the business as it offers a chance for the organization to plan the course of action. However, each location should be projected different because of the variance in various factors such as demographic and area. Moreover, forecasts give an organization a sense of direction by confining them to the goals and objectives of the organization.

Case 2

Despite forecast being a mere projection of occurrences in future, it must be based on accurate data to ensure the projections are correct. For the top management to approve any project based on projection, they must be provided with the proof that from the past series of events the event is likely to occur as projected (Abraham, 2009). Wrong and inaccurate data may lead to wrong projections which will eventually lead to the failure of the business. The events must show consistency in their order of occurrence.

References

Abraham, B. &. (2009). Statistical methods for forecasting (Vol. 234). . John Wiley & Sons.

Unit 6 Discussion: Forecasting Instructions

Professor Halverson and Class:

Forecasting is important to businesses because it allows them to project their expected performance, revenues, and processes and make judgements based on those projections. Forecasting provides a foundation for businesses to operate, and over time forecasting can be projected off of historical data and a baseline for a company.

When opening a new product line, forecasting plays a huge role in the first few years of business. Each time that my organization opened a new location, forecasts were made for each individual location. It was important to collect data about the neighborhood and their projected use of our healthcare facility in order to forecast our expected number of patients for each quarter over the first two years. Additionally, we were required to forecast all costs associated with opening and operating the new location. Once this information was forecasted, we had a baseline to work off of. We knew exactly what goals we needed to meet and the specific steps to get there through a detailed written out plan for each forecasted step. As time progressed, we would substitute historical data in the mix when opening new product lines. We could compare the performance of a health center close to the demographic neighborhood that we were opening in, and apply those numbers when projecting a forecast.

Forecasting the performance of a clinic location allowed for our organization to make better business decisions that aligned with the overall goals and performance of the organization itself. Some of the key components to the planning of the forecast included: expected number of patients, expected ratio of self pay vs. insurance, expected business costs, expected operating cost, expected growth pattern, strategic plan to extend hours and the effects. By operating on a tight and organized forecasting operation, this organization expanded from one to thirty-six in just six years.

-Suzette

 

Joseph Norman

6/26/2016 5:46:51 PM

Unit 6 DIscussion

Hello class,

One of the situations I’ve used forecasting in is one that I am actually currently in the middle of. At work, we have something call the Technology Cafe where people can come in with their equipment and we’ll provide tech support in a very similar way to a genius bar would at Apple. The problem present is that even with the growing popularity, we have not gotten any additional head count, also known as additional staff. The additional problem is that it is very difficult to get more head count and you need to convince upper management that it would be worthwhile.

The reason we had to use forecasting is to present our case to the upper management to get additional staffing. Currently they have me working in there under a projects salary so that they can back-fill their increase in traffic. A problem we had was that we were not measuring our wait times or anything of the sort so we started by getting a camera that can automatically log how long people are waiting in line, how many people leave the line, how many people we help each day, and how long we spend with each person on average. With these statistics we can look at days where we only have 4 people (the typical amount present) versus 5 people. We can then estimate whether traffic is increasing or not and present a case to upper management. Our data is not quite complete but, thus far, we have noticed that when there are 5 people, customers are much more pleasant to deal with and there is rarely ever a wait time. Soon we will be making our push for a head count of 5 people once we gather enough data.

 

Business Statistics: Forecasting Sample paper

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Business Statistics: Forecasting Sample paper

Business Statistics: Forecasting Sample paper

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Forecasting is important in the analysis of business trends. Forecasting makes use of past and present data to predict future trends. Forecasting can be used in inventory control. Inventory control aims at achieving an optimal level of stock in the business. The optimal level can be defined as the level where the business has sufficient supplies to cater for future demands, and the right amounts that minimize stock carrying costs. Manufacturers, wholesalers and even retailers need to establish stock levels at which they can replenish their inventory. Forecasting can help in establishing optimal stock levels in the business (Hyndman & Athanasopoulos, 2014). .

The first step is to identify lead time. Lead time can be defined as the time duration between making an order and the time the order reaches the premises. Since there may be unforeseen events that may delay delivery of products to the premises, a safety stock is often maintained. Safety stock refers to extra stock that the business keeps for such unforeseen emergencies. The reorder point can be given by the equation: Reorder point = lead time demand + safety stock. Lead time demand is given by the product of forecasted daily unit sales and the number of lead time days. Safety stock can be maintained at a particular percentage of the lead time demand.

In order to establish the reorder point, daily unit sale forecasts must be made. This can be established by examining historical sales figures for the business. The exact number can also be known especially for businesses that rely on standing orders from clients. Other factors such as seasonal fluctuations in demand are also taken into consideration. From the above, the reorder amount can be established. The reorder amount gives the amount of stock or raw materials that the business should order. This can be calculated as:

Reorder amount = , where au is the annual demand, oc the order cost, and acc the carrying cost per unit

 

 

Reference

Hyndman, R. J., & Athanasopoulos, G. (2014). Forecasting: Principles and practice.       Heathmont, Vic.: OTexts.

Question:

Describe a situation where it would be appropriate to use forecasting. Be sure to include all the necessary steps to develop the forecast and why you would use the forecast you chose. Please be thorough and provide enough detail to allow meaningful responses from your classmates.

Research the following topics related to Service Design:

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Questions:

Research the following topics related to Service Design:

  1. Specification
  2. Blueprint
  3. Queue
  4. Goods
  5. Phases

Select three of the topics listed and compose three paragraphs describing the topics, one paragraph per selected topic, based on the course material and additional research you conduct online.

Sample paper

 

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Sample Paper on Product Design

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Specification generally refers to production requirements. Specification stands for operational or technical requirements that that may either be internal or external (Baxter, 1995). Specification can also be defined as requirements that ought to be satisfied by design, material, or final product. Product specification is related to meeting of requirements that related to design, material, and product. Specification may also relate to the technical standards of a product. The core purpose of a design specification is to anticipate problems or issues that may cause a product to fail and to establish critical design targets that could avert such a failure. A product’s success is determined by four critical things which include: whether the product will sell, whether it will work as expected, when it can be made, and lastly whether it complies with outlined legal obligations.

Blueprint

Blueprint in service design gives a critical look at individuals and their service interactions. Service blueprints are used to give a clear and accurate picture of services. A service blueprint clearly defines and presents the service process to a variety of individuals involved in production as well as consumption. A blueprint helps people to clearly understand the various processes of a service and hence eliminates ambiguity in services. The blueprint serves as a visual depiction of the various roles played by customers as well as the employees. By visually depicting the systematic arrangement of various service touch points, employees are able to better understand the roles they ought to play. The decision theory is often used in establishing a service blueprint (Rama, 2011).

Phases

Phases represent distinct or unique step that is often involved in coming up with a whole product. Products go through various stages or phases during the production process. Each of these phases represent a step towards achieving the final product. In product design and development, there are a total of nine phases which summarize the entire process. The first phase is the idea generation. This is followed by a feasibility study. The third phase is product specifications which is followed by process specifications. The fifth phase involves development of a prototype or samples. The sixth phase is design review where necessary changes are made to a product. This is followed by a market test which is conducted to establish consumer acceptance of the product. This is followed by product introduction and lastly evaluation (Amin, 2011).

 

References

Amin, J. (2011). Phases in product design and development. Retrieved from:             https://www.scribd.com/doc/55941384/Phases-in-Product-Design-and-Development

Baxter, M. (1995). Product Design. Boca Raton: CRC Press.

Rama, M. R. K. (2011). Services marketing. New Delhi: Pearson.

 

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Research the following topics related to Lean Systems:

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Research the following topics related to Lean Systems:

  1. JIT
  2. Lean Production
  3. Kanban
  4. Kaizen
  5. Poka-yoke

Select three of the topics listed and compose three paragraphs describing the topics, one paragraph per selected topic, based on the course material and additional research you conduct online.

Sample paper

 

 

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Lean Systems

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Date

JIT

Just-in-time (JIT) is a management philosophy whose origins can be traced to Japan in the 1970s. JIT philosophy establishes six crucial aspects to consider in the manufacturing process. The six aspects are important in improving efficiency and effectiveness in the production process and include: having the right items, having the items at the right quality, right quantity, right place and right time (Cheng, Podolsky, & Jarvis, 1996). The use of the management philosophy is attributed to improved production process. The major areas of improvement include: improved communication, productivity, reduction in costs & wastes, high quality products, and efficiency in production process. JIT philosophy has certain unique characteristics that enables businesses achieve the aforementioned improvements. First, the management philosophy calls for demand driven production. Second, it advocates for the least possible time lapse between receipt of materials, processing, and moving the products to consumers. Third, it ensures minimum raw materials, work-in progress and finished goods levels.

Kaizen

Kaizen is a Japanese management philosophy that calls for daily improvements in the working practices and personal efficiency at the workplace. Kaizen philosophy perceives errors as a scrim overlying innovation and improvement opportunities. Kaizen philosophy is about making continuous improvements at the workplace. In essence, Kaizen philosophy advocates for businesses to always improve things and make them better that they were. There are four principles of Kaizen philosophy which include: continuous improvements, all cooperation in order to make improvements, improvements in every facet of the company & in personal life, and making small continuous improvements to large strategic improvements. Kaizen philosophy also advocates for customer orientation (Takeda & Konradt, 2006).

Poka-Yoke

Poka-Yoke is a lean manufacturing philosophy that calls for mistake proofing in a variety of manufacturing aspects such as procurement, distribution of final products, customer service, and others. This philosophy aims at minimizing chances of error in the production process. In each single production step, errors are significantly minimized, thus improving the entire production process. Poka-yokes refer to the specific mechanisms that a business can employ to avoid errors in each step.
poka-yokes are categorized into two namely: prevention-based methods (warning & control)  and detection-based methods (motion step, fixed value, & contact) (Takeda & Konradt, 2006).

 

 

 

 

 

 

 

 

 

Reference

Cheng, T. C. E., Podolsky, S., & Jarvis, P. (1996). Just-in-time manufacturing: An introduction. London, Angleterre: Chapman and Hall.

Takeda, H., & Konradt, G. (2006). The synchronized production system: Going beyond just-in-    time through Kaizen. London: Kogan page.

 

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Economic Order Quantity

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Week 3 Discussion 1

 

Economic Order Quantity

Analyze the following scenario:

Meals for the Homeless buys 30,000 large cans of green beans each year.

The cost of each can of beans is $4.

The cost to place an order for beans, including the time of the employee placing the order, shipping, and so forth, comes to $20 per order.

The out-of-pocket carrying costs (for storage, etc.) are $0.30 per can per year.

In addition, Meals calculates its interest at 5 percent.

How many cans should be ordered at a time?

How many orders should there be each year?

What are the total ordering costs and carrying costs at the EOQ?

Contrast the total of the ordering costs and carrying costs at EOQ to the total ordering and carrying costs if the cans were all ordered at the beginning of the year.  (You will need to read and understand Appendix 7-A to complete this discussion).

Clearly label the calculations of the economic order quantity using an Excel worksheet. Use formulas to calculate the EOQ and format the cells to insert a comma if there is more than three numbers.  Round to the nearest whole number.

Explain the advantages and disadvantages of EOQ in a Word document not to exceed 200 words.

Text Reference

Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L. (2013). Financial management for public, health, and not-for-profit organizations (4th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

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See below for stated reference Appendix 7-A

Appendix 7-A Economic Order Quantity

As noted in the chapter, in addition to having to pay for inventory when, or shortly after, it is acquired, there are other costs related to inventory. We must have physical space to store it, we may need to pay to insure it, and there are costs related to placing an order and having it shipped. A method called the economic order quantity (EOQ) considers all of these factors in calculating the inventory level at which additional inventory should be ordered.

The more inventory ordered at one time, the sooner we pay for inventory and the greater the costs for things such as inventory storage. These are called carrying or holding costs However, if we keep relatively little inventory on hand, to keep carrying costs low, we will have to order inventory more often. That drives ordering costs up. EOQ balances these two factors to find the optimal amount to order.

There are two categories of carrying costs: capital costs and out-of-pocket costs. The capital cost is the cost related to having paid for inventory, as opposed to using those resources for alternative uses. At a minimum, this is the forgone interest that could have been earned on the money paid for inventory. Out-of-pocket costs are other costs related to holding inventory, including rent on space where inventory is kept, insurance and taxes on the value of inventory, the cost of annual inventory counts, the losses due to obsolescence and date-related expirations, and the costs of damage, loss, and theft.

Ordering costs include the cost of having an employee spend time placing orders, the shipping and handling charges for the orders, and the cost of correcting errors when orders are placed. The more orders, the more errors.

There is an offsetting dynamic in inventory management. The more orders per year, the less inventory that needs to be on hand at any given time, and therefore the lower the carrying cost. However, the more orders per year, the greater the amount the organization spends on placing orders, shipping and handling costs, and error correction. The total costs of inventory are the sum of the amount paid for inventory, plus the carrying costs, plus the ordering costs:

Total Inventory Cost=Purchase Cost+Carrying Cost+Ordering Cost

The goal of inventory management is to minimize this total without reducing the quality of services the organization provides.

We will use TC to stand for the total inventory cost, P to stand for the purchase cost per unit, CC for the total carrying cost, and OC for the total ordering cost. N will stand for the total number of units of inventory ordered for the year. Therefore,

TC=(P×N)+CC+OC

(7.A.1)

We will let C stand for the annual cost to carry one unit of inventory. The annual total carrying cost, CC, is then equal to the carrying cost per unit, C, multiplied by the average number of units on hand. Assume that Q is the number of units of inventory ordered each time an order is placed. On average at any given time we will have Q ÷ 2 units on hand. If we start with Q units and use them until there are 0 units left, on average we will have half of Q units on hand. Carrying costs are determined using the average number of units of inventory on hand. The carrying costs will therefore be as follows:

CC=C×Q2=CQ2

(7.A.2)

That is, the carrying costs per year (CC) will be equal to the carrying costs of one unit (C), multiplied by the average number of units on hand at any given time (Q/2).7

7 This becomes somewhat more complex if a safety stock is kept on hand at all times. In such a case the CC is equal to C multiplied by the sum of Q ÷ 2 plus the safety stock. However, this is not needed for the EOQ calculation. Safety stocks will not affect the economic order quantity, since they are projected to be constantly on hand regardless of the frequency or size of orders.

A formula can also be developed for ordering costs. We will let O stand for the cost of making one order. The total ordering cost, OC, is the cost of making an order, O, times the number of orders per year. Recall that the total number of units needed for the year is N and Q is the number of units in each order. Then N/Q is the number of orders placed per year. The ordering costs are as follows:

OC=O×NQ=ONQ

(7.A.3)

That is, the total cost of placing all orders for the year (OC) is the cost of making one order (O) multiplied by the number of orders per year (N/Q). For instance, suppose that Meals for the Homeless buys 2,000 sacks of rice each year (N = 2,000). If it orders 200 sacks at a time (Q = 200), it would have to make 10 orders per year (N/Q = 2,000/200 = 10).

We now can calculate the purchase cost ofthe inventory, the carrying costs, and the ordering cost. Suppose that Meals pays $2 per sack forrice. Each time it places an order, it takes a paidclerk about $8.075 worth of time to process the order. The delivery cost is $1 per order. This $9.075 is the only ordering cost. Meals could earn 8 percent interest on its money. Therefore, the capital part ofthe carrying cost is $.16 per sack per year (8% × $2 price = $.16). Other carrying costs are determined to be $2.84 per sack per year. Therefore, the total carrying costs are $3 per sack per year. What is the total cost of inventory, assuming that there are 10 orders per year?

TC=(P×N)+CC+OC

(7.A.1)

The first part of the equation to be calculated is the purchase cost of the inventory:

P×N=$2×2,000=$4,000

Next, we need to find the carrying cost:

CCCC=C×Q2=CQ2=$3×2002=$300

(7.A.2)

Finally, we need the ordering cost:

OCOCO×NQ=ONQ=$9.075×2,000200=$90.75

(7.A.3)

So the total costs are as follows:

TCTC=(P×N)+CC+OC=$4,000+$300+$90.75=$4,390.75

(7.A.1)

However, it was arbitrarily decided that there would be 10 orders of 200 sacks each. The EOQ model is designed to determine the optimal number to order at one time. The formula to determine the optimal number to order at one time is as follows:

Q*=2 ONC‾‾‾‾‾‾√

(7.A.4)

where Q* is the optimal amount to order each time.

Q*=2×$9.075×2,000$3‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾√=110

This result differs from the 200 sacks per order that we used earlier. If we use this result, how will it affect total costs? The purchase cost will still be $4,000. However, the carrying costs and ordering costs will change:

CCCC=C×Q2=CQ2=$3×1102=$165

(7.A.2)

Finally, we need the ordering cost:

OCOC=O×NQ=ONQ=$9.075×2,000110=$165

(7.A.3)

So, the total costs are as follows:

TCTC=(P×N)+CC+OC=$4,000+$165+$165=$4,330

(7.A.1)

The new total cost of $4,330 represents a cost decrease of $60.75. Relative to the total cost, this may not seem to be a great savings. However, if you put aside the purchase cost of the inventory, the carrying and ordering costs have fallen from $390.75 to $330. This is more than a 15 percent savings. Across all inventory items for an organization, this could amount to a substantial dollar amount of savings.

It is not coincidental that the ordering cost equals the carrying cost. The total cost is minimized at the point where these two costs are exactly the same!

It is important that EOQ calculations only include relevant costs. Carrying and ordering costs that are relevant are those that vary as a result of our EOQ decision. That is, if ordering more or less frequently will affect a cost, it is relevant and should be included in the calculation. For example, ordering less frequently will likely increase capital costs related to interest. It would also likely affect shipping and handling, so these are relevant costs that belong in the calculation. By contrast, the cost of the purchasing department manager will probably not change with the number of orders. Therefore, none of that manager’s salary should be included in the ordering costs.

The basic EOQ model, as presented here, involves making a number of assumptions that are often not true. For example, it involves assuming that any number of units can be purchased. In some cases, an item might only be sold in certain quantities, such as hundreds or dozens. Another assumption is that the price per unit does not change if we order differing numbers of units with each order. It is possible that we might get a quantity discount for large orders. Such a discount could offset some of the higher carrying cost related to large orders.

Another assumption is that we will use up our last unit of an item just when the next shipment arrives. A delay in processing, however, could cause inventory to arrive late, and we might run out of certain items. To avoid negative consequences of such stockouts , we might want to keep a safety stock on hand. How large should that safety stock be? That will depend on how long it takes to get more inventory if we start to run out. It also depends on how serious the consequences of running out are. Is it life or death, or merely an inconvenience?

One of the greatest difficulties in employing EOQ is determining the carrying and ordering costs. In most cases, however, at least the major components of such costs—for example, the amount of labor needed to place an order—can be calculated. The purpose of this discussion of EOQ is to familiarize the reader with the basic concept of inventory management. Many more sophisticated issues, such as those noted here, are addressed in more advanced books on managerial accounting and on operations management. Some of these are included in the list of readings at the end of the chapter.

Inventory models are a part of any efficient management operation that invests dollars in inventory. Public, health, and not-for-profit organizations have often considered their inventories to be of nominal value. However, the costs of ordering and carrying inventory are sometimes surprisingly high, and use of a tool such as EOQ should at least be examined for potential savings.

Key Terms from This Appendix

carrying costs of inventory

Capital costs and out-of pocket costs related to holding inventory. Capital cost represents the lost interest because money is tied up in inventory. Out-of-pocket costs include such expenses as insurance on the value of inventory, annual inspections, and obsolescence of inventory.

economic order quantity (EOQ)

Approach to determine the balance between ordering costs and carrying costs; optimal number of units of inventory to be ordered each time an order is placed.

holding costs

See carrying costs of inventory.

ordering costs

Includes those costs associated with an order of inventory such as clerk time for preparation of a purchase order.


 

stockout costs

Costs incurred when an inventory item is not available but is needed.

 

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Economic Order Quantity Sampe paper

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If the cans were all ordered at the beginning of the year, the total inventory cost would be higher. Total inventory cost for cans ordered periodically adds up to $12, 0774.6 while the total cost of total inventory ordered at the beginning of the year is $15,020.

There are certain benefits as well as drawbacks in using the Economic Order Quantity concept to determine optimal stock levels. One of the benefits of EOQ is that it reduces inventory levels and consequently stock holding costs. EOQ analysis provides business owners with information about the most economical quantity of stock they should purchase. Another benefit of the model is that it is specific to the business and hence of great use to the business. EOQ encourages businesses to purchase stock in large quantities which enables them to obtain large quantity discounts. Lastly, it encourages more efficient production planning since orders follow a similar sequence (Finkler et al., 2013).

On the flip side, EOQ analysis is based on assumptions. For instance, there is the assumption that demand for products is constant throughout the period while in reality, demand for various products keeps fluctuating. The model also assumes fixed stock holding charges, ordering charges, and costs of inventory units. Another drawback is that EOQ is inflexible to consumption patterns. If a review is conducted and then the usage rate changes, the business may run out of stock before the next period. Lastly, reorder quantities may not be entirely correct (Finkler et al., 2013).

 

Reference

Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L. (2013). Financial management for             public, health, and not-for-profit organizations (4th ed.). Upper Saddle River, NJ: Pearson             Prentice Hall.

 

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